Remarks by Charles Bohl

Director
Masters in Real Estate Development and Urbanism
School of Architecture
University of Miami

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In terms of changes and trends impacting the real estate development industry, we are already at the forefront in South Florida compared to nationally. I visit a lot of projects. I visit a lot of places around the country. Since I am in the School of Architecture, I will give you some images to go along with what I’ll talk about in terms of development trends, highlighting in particular examples of mixed-use development. At the end I will come back to the importance of creating new knowledge for real estate development through the University of Miami, because we are going to need new knowledge to face the changes that are coming. The good news is that if you look beyond our immediate short-term time frame, and you look longer term there is good reason for optimism.

Impact of U.S. Population Growth

This is from a study done by Arthur C. Nelson for the Brookings Institute. You can go to the Brookings Institute Web site and find the study, Toward a New Metropolis: The Opportunity to Rebuild America. Nelson has simply taken employment and population projections and extrapolated the need for new and replacement residential, commercial, and industrial space in major metropolitan markets throughout the U.S. within the next 30 plus years. During this time period we will add another 100 million people to the national population. Of course, a lot of that will continue to go south and west, and that translates, in the big picture snapshot, into what’s on the ground in 2030. Nelson concludes that about one-half of what exists by 2030 did not exist in the year 2000. So if we can look ahead, we not only have a great opportunity to literally “rebuild America,” but a huge challenge and the question is, is it going to look the same way as it has before or are we going to do something different to respond to the huge changes taking place in our demographic make-up, energy markets, transportation systems, housing markets, financial tools and policies, and a host of other issues and trends.

Changing Markets

Now, the market for many products is no longer one mass market, there are many markets for many variations of the same products, and they don’t look much like what came before. And this is the same with real estate. Demographics change, costs change, other policies change, and therefore our paradigms have to change with that. If we just base future development on what has sold in the past, taking a “rear-view mirror” approach to development, we are going to have trouble. [Image of the “Leave it to Beaver” family] This is my cohort, a traditional one-worker family with two kids and two parents in a household. This used to represent nearly one-half of all households after World War II, and a lot of our development models are based on products for this market niche. If you are developing products for this market you are now targeting a mere 15 percent of all households in the U.S.

Here are just a couple of examples of how household composition is changing from a few different studies. Empty nesters and retirees are, in fact, downsizers. When you take a closer look, however, you find some surprises. A new USC study looks at this and finds that people 55 plus are actually three times more likely to choose an urban townhouse than someone in their mid-twenties or thirties. I was kind of surprised when I saw that. Households with children, which as I mentioned were nearly 50 percent of households in 1960, will be down to 28 percent by 2025, and that is going to be equal to the percentage of households that are single. So there are big changes in the composition of the demographics taking place right now. Out of the 32 million of the new households created over the next 25 years, 88 percent of those households will not have children, so it is going to look very different from the “Leave it to Beaver” generation.

Aging Baby Boomers

At the same time, something that we have been talking about for a long time is going to arrive in full force: 70 to 80 million or so baby boomers have begun entering their retirement years. The annual number of people turning age 65 illustrates how this trickle will quickly turn into a flood that will have major implications for real estate markets and products. Between 2000-2006 there were 350,000 people per year turning 65; now (2007-2011) we are in a time period where it is 800,000 people per year reaching the age of 65; and when we hit 2012, that becomes 1.5 million per year turning age 65 and older and that trend continues through the year 2020.

Dowell Myers has taken a look at the aging baby boomers and warns of this trend creating a generational housing bubble. He looks at the point at which people at certain ages shift from becoming net buyers to net sellers of homes, and you can see in this chart (SLIDE 7) that happens right about at age 60 or so. Myers is saying that the future buying and selling actions of this big group of people, the baby boom cohort, has major implications for housing markets. Pairing this with what Nelson is saying - that overall there are going to be 100 million people added to the population - and you’ve got an aging population in housing stock that probably doesn’t line up with what this next generation’s housing demands and preferences are going to look like.

The potential mismatch does not only involve the supply and demand of different types of housing, but trends in the population, employment, education and income of future buyers. This brings up issues such as immigration policy, the importance of immigrants as a large part of the future buyer group, as well as the education and income levels of immigrants that will impact housing preferences. Nelson has taken a look at a lot of markets in metropolitan areas impacted by these trends, where you can see the changes in demographic composition and has projected that we may already have a surplus of low-density, large lot, single family housing product in a large number of regional markets that will continue to grow as the population changes.

So the future looks very different in the terms of who we are developing and building for and this is just one slice of it. It requires us to “think differently” about real estate, and the iPod is the perfect example of a product that completely revamped the way music is delivered and experienced. This is a reason why Chris Lineberger, a real estate analyst and fellow with the Brookings Institution, talks about “walkable urbanism,” as the emerging alternative to “driveable suburbanism.” And not in a way you may have heard about it in the past - you know suburbanism versus urbanism. He presents it very rationally, as drivable suburbanism was a very rational, very appropriate choice for a certain time period, certain demographics, and market conditions and that now we have arrived in a very different time period and those preferences and market conditions are changing.

The Impact of Higher Energy Costs

The whole impact of energy costs, and this is a funny slide (SLIDE 10) to me because I made this slide about five years ago, because the prices rolled up and then they rolled back but I just kept using the slide because I knew it was going to just roll right back up, and now we are well past this $3 per gallon threshold that people thought was so outrageous. As everyone knows, rising energy costs are having a major impact on everything from transportation to national security to the cost of groceries.

The term “sustainability” is now more than a buzzword, it is becoming part of an emerging business model in real estate. Early in the 20th century, when the Olmsteds were creating the field of landscape architecture, you might say there was a “sustainability aesthetic,” focused on the creation of beautiful parks, boulevards, cities and suburbs. When Ian McHarg wrote Design with Nature in the 1960s there was a “sustainability ethic;” the dialog was about what we should do with respect to the environment. Today we are faced with a sustainability imperative, where energy conservation, transit-oriented development, mixed use and sustainable development are part of the bottom line driven by market forces and critical public policy issues.

But it’s not just cost, it’s also convenience that is driving changes: the amount of time people are willing and able to spend commuting. People who can afford to change, to live closer to work, shopping, dining and entertainment, are already moving and this will become an increasingly more important choice for people: where they choose their home and also where they locate businesses.

The Public Process

I’d say there have always been three critical areas of innovation in real estate. One is finance, and we can see how important the continued advancement and refinement of financing tools and mechanisms has become in the sub-prime meltdown. But also for improving the methods for financing projects involving mixed-use and vertical development, long-term multi-phased projects, and public-private partnership arrangements. The second has been planning and design, and the School of Architecture has been a leader in advancing livable community planning and design. The third area, and the most volatile and unpredictable of the three, is the public process. I think that we have gotten much better on the finance side and we’ve gotten much better on the planning and design side. But you can go anywhere in Florida and you know that the public process remains an issue for real estate development and community growth, development and redevelopment. I think that this is an area that is desperately in need of new knowledge. It’s not just public policy, it’s the public process itself. Remember this petition for “hometown democracy.” This is merely a statewide symptom of much broader and deeper conflicts at the local level in communities throughout Florida and the U.S. over community planning, growth and development. We are in need of new ways to structure and conduct the public process so it ensures fairness and a constructive dialog that helps generate development that is both profitable and sustainable. Let’s go on for now and we’ll come back.

Balancing Risk with Mixed-Use Development

In any business it is important to manage risk. One way is market-timing. We know how badly that works in the stock market. It does not work well in real estate either, figuring out when I should stop building one thing and start building another. OPM, “other people’s money,” is another way to balance risk. But if you use OPM and things don’t work out so well, it is very difficult to go back and rely on OPM again in the future. A third way to manage risk – also borrowing from the mutual fund industry’s mantra – is to diversify.

There are a lot of great companies that were building one particular product over the last few years that ran into a very bad situation, a lot of great companies that aren’t going to be around anymore because of that. If you look at any industry, if you build just one single product all day long, year after year, you are not diverse and you are very vulnerable to any market fluctuations that impact that product. The ability to build in different real estate sectors, or build mixed-use, is one way to build in some protection from risk, and insulate your company from downturns in any one particular sector. So diversification through mixed-use is one direction and it’s now showing up everywhere.

At Urban Land Institute conferences - you’ve probably been to some of these - ICSC events, certainly in retail, NAIOP, BOMA – all of these organizations, in every sector, mixed-use is the topic of discussion and is recognized as a major trend. Here is an event that is coming up in the hospitality industry (SLIDE 19). This is actually the fourth annual mixed-use hospitality hotel for residents and condo hotels. What’s driving it? Well, this is Miami about 100 years ago, and this is Miami five years ago. One obvious factor is rising land values. It’s not just because somebody thought it was a good idea, or it’s more urban or its lifestyle-oriented; it’s fundamental that land values play a major factor in the growing trend in mixed-use development. Secondly, in the conventional one-story, single-use model, where you lease out retail space on the ground floor but have nothing but air above, you can’t make much money leasing or selling the air above. So again, fundamentally this is a business aspect driving vertical mixed-use development and not just a nice idea. Here is an example from the Kentlands, one of the Lizz Plater-Zyberk's projects, up in Gaithersburg (SLIDE 23).

No More Enclosed Shopping Malls

I’ll give you some visuals to illustrate how mixed-use is showing up in different real estate sectors and different geographic regions throughout the nation. One is in retail. In case you haven’t noticed, we aren’t building anymore enclosed shopping malls, here’s the chart (SLIDE 25). From 2005 to 2009 the number of shopping malls built in the entire U.S. totaled two, one, zero, zero, no more shopping malls. This doesn’t mean shopping malls are going to disappear – strong malls are becoming stronger while weaker ones are dying – but the markets for enclosed shopping malls have been saturated and shopping trends are clearly moving in the direction of open-air centers. There are a lot of properties throughout our region that are underutilized and make for a potentially very good-sized properties for redevelopment as mixed-use development. So main street formats, town centers, these are in all different markets – San Jose; Charlotte, North Carolina; and Garland, Texas.

The Simon Group has done its first full-blown town center (SLIDE 29). And a lot of them are hybrids – you have an enclosed mall portion, but you also have an open-air portion. You have some mixed-use with single-use. Then there are life style centers, which are a big trend within retail that increasingly, are going mixed-use, again, driven by land values, driven by opportunities. An example is in Phoenix (slide 31). This is what you can put together with your retail in your upper left, inter-office or residential above and then when you put it together it has more value than the pieces by themselves. Kierland Commons was up around $700 per square foot. These are very nicely performing assets.

It’s also not imperative that everything has to be vertical mixed-use. This is an example from Columbus, Ohio - Easton Town Center - with horizontal, adjacent mixed-use. We have a big retail component, with urban residential next door. This project draws 20 million people per year in a real cold climate to an open-air format.

In residential, same thing, and in a lot of these cases this is a classic situation where you cannot use the rear view mirror to predict what could sell. This is in suburban Portland, along the Light Rail line (SLIDE 34). Orenco Station town center has lofts above restaurants and retail and there was no such residential product in the market, so they had to come up with kind of loosely conceived comparables, and these have done very well, as have a lot of these urban housing types. In a lot of cases there simply was nothing to compete with them, and they were all able to come in at a pretty high end of the market because of that.

Again, getting back this idea of diversified portfolios, take a project like Kentlands, and look at the mix of housing types throughout the project. Single families, attached townhomes, condos, apartments, and apartments above garages. You can have a whole mix, and if you are savvy enough and you have a very good master developer, you can shift between product types as the market shifts. Baldwin Park is one of our own examples in Orlando, Florida, with another great mix of urban housing types.

Office Development

And then office, another one of the groups we are talking about. Baby boomers and younger workers – particularly the dot-com and information industry workers - are really not enamored of the isolated office park campuses of the 1960s and 1970s, although these are now great opportunities for mixed-use infill and re-development. But these folks, as Scott was mentioning, prefer a lot more social interaction, they work long hours, and they have very different lifestyle preferences than previous generations, (here is Bill Gates lying on his desk at the top). Here is an example in Plano, Texas of infilling a town center within an office park, and we have office park properties here in this region, office campuses, that are undergoing redevelopment towards mixed-use (for example, the Koger Center). The large amount of open space in office parks means that you do not have to tear down all of the office to do it, but it creates really good opportunities to live near where you work, and this has a combination of hotels, urban housing, retail.

Here’s Winter Park Village, a redeveloped shopping mall site up in Winter Park. Live-work, the reemergence of live-work, also has major code implications and that’s probably the other area that is really important for new knowledge: the transformation from single-use zoning codes to mixed-use form-based codes.  For example, these live-work buildings in the Kentlands, which performed extremely well on the market, required a complete section of the code to be written, because it was just not allowable within the existing code, and so required some extra work. And again, we see the infill within urban areas, within existing cities, not just out on the fringe, and then being able to build flexibility into projects. This is an example of Celebration, with the ground floor originally built as apartments but designed to be able to convert from residential to office and retail and that has in fact now happened.

Building New Knowledge for Real Estate

These are exciting examples of where the market is headed, not just in one sector but across sectors in real estate. They involve innovative financing, planning and design, market analysis and marketing, code reform and public-private partnerships. Here at the University of Miami we are building strong interdisciplinary programs in real estate that blend the University’s strengths in business, architecture, law, and engineering to prepare the next generation of real estate developers, professionals and entrepreneurs. The School of Architecture has been at the forefront of advancing livable community planning and design and the School of Business Administration is now positioning itself to do the same for real estate finance. This last slide illustrates the great potential for our interdisciplinary approach, an MIT thesis on “Innovative Financing for a Better Built Environment,” written by Matt Lister, a graduate of the University of Miami School of Architecture who went on to MIT for a masters degree in real estate. Through graduates like Matt, the University of Miami is preparing to build the new knowledge and expertise necessary to succeed in real estate in the future by generating influential research, educating the next generation of real estate industry leaders, and providing meaningful forums for industry professionals, policymakers and citizens.